Cautious optimism for dairy prices moving forward

Global dairy commodity prices are expected to continue to rise in 2017 due to reduced milk supplies and improved import demand, AHDB Dairy has reported.

This assertion is based on Rabobank’s latest outlook projection for the dairy market.

Significantly, it predicts that producers will struggle to expand production to take advantage of rising prices until at least the second quarter of 2017.

This is particularly true for the EU, AHDB has said, where the milk production reduction scheme has been put in place by the European Commission.

Rabobank has also warned that the effect of the scheme is still uncertain, particularly now farmgate prices are increasing.

Participants could still choose to produce to receive the market price, rather than taking the reduction payment.

If the scheme’s usage is lower than anticipated in late 2016 and early 2017, it has said that milk production could recover earlier than expected.

According to Rabobank, this would put significant downward pressure on global prices next year.

Meanwhile, Rabobank’s World Dairy Map for 2016 points out that the trade in milk products has suffered a number of massive blows in the last three years.

The Russian trade embargo, the slowing of demand growth from China, the impact of low oil prices on demand from oil exporting countries and the strengthening of the US Dollar have all had an impact on the demand for imports.

The expansion of production surrounding the removal of production quotas in Europe added to the pain and resulted in a period of extremely low world prices.

Looking forward, none of these issues has been resolved. According to Rabobank, the Russian ban will be in place at least until 2017.

Demand from China will continue to grow but at a slower rate, oil prices are forecast to remain at around the US$50/barrel mark, and the dollar is forecast to maintain its high value against other currencies.

As a result, dairy trade is likely to grow at a slower rate than in recent years, driven more by population growth than per capita consumption increases.

But this comes at a time when further rapid expansion of export volumes would be more difficult, with further New Zealand expansion limited by land availability, Europe stabilising after milk quota removal, and the US export ambitions limited by domestic demand growth and the strong US Dollar.

Rabobank analysts also point out that trade is likely to remain dominated by regional rather than global routes with free trade agreements significantly influencing volumes.

The exception will be Asia, which will continue to be a highly competitive battle ground for exporters from around the globe, it found.

All of this must be overlaid with the potential for the renegotiation or cancellation of trade agreements following the US election results.